Tuesday, September 08, 2015

The Financial-Industrial Revolution's Origin and Destiny

The industrial revolution made the modern world. Before it took off in the late eighteenth century, most people in Europe and elsewhere lived sustainably on renewable resources in traditional societies. Such limited energy as was available came from wind (sailboats, windmills), hydropower (waterwheels), wood (heating and cooking fireplaces and stoves), and muscle power (human and animal labor). There was no electricity, little or no heavy machinery, no modern medicine, virtually no appliances or other labor saving devices, and no telecommunication. Travel was laborious and slow. Almost everything had to be made by hand with simple technology. Death and birth rates were high, mostly because of infant mortality.

Imagine a world without fossil fuels or electricity and you begin to come close to what it was like. Life was simpler, to be sure, more natural, anchored in traditional wisdom and reliant on herbal remedies—since widely disparaged—and certainly without the stresses associated with modern life. Ritual and community were strong; most people were embedded in an intense network of social relations.
The gap between then and now is enormous. Our world today would be a total and unimaginable fantasy—or nightmare—to anyone living 250 years ago.

The question is: How did we get from there to here?

Most explanations of the industrial revolution, and indeed the rise of the whole modern world, miss the mark. They invoke purported causes such as the development of science, technological innovation, political stability, and the use of fossil fuels, beginning with coal.

None of these factors, alone or even in combination, provides a plausible explanation. All of them were present at other points in the past, and did not lead to an industrial revolution.

The ancient world, especially the Greeks, arguably had a scientific revolution, as well as considerable technological innovation, and, under Hellenistic monarchs and later the Romans, political stability, and yet no industrial revolution occurred. The potential for fossil fuels was there as well. China, at various times in its long history, also had the same ingredients, but, again, no industrial revolution occurred. Perhaps also India and the Arab world.

These conditions again obtained in Britain in the eighteenth century, but this time an industrial revolution did occur.

What was the difference?

The vital factor, I argue—present in late seventeenth and early eighteenth century England, and absent in earlier situations—was an institutionalized system of broad, debt-based finance. For the first time in world history large-scale credit became available to fund public and private enterprises.

This “financial revolution” is seldom noted, and even more rarely, pardon the pun, credited. The classic work on the subject—The Financial Revolution in England: A Study in the Development of Public Credit, 1688-1756, by P. G. M. Dickson (1967)—remains out of print.

Credit, to be clear, long preceded the financial revolution. A recent popular book by David Graeber—Debt: The First 5000 Years—traces credit all the way back to the temple economies of Sumerian city states.

But the traditional sort of credit Graeber describes was severely limited. Commercial loans were generally made to finance a relatively narrow, reliable range of projects, such as the planting of a cash crop, or goods expected from a trading expedition, and usually had to be paid off in hard-to-get precious metals.

More importantly, traditional loans of this sort depended on finding the relatively few potential creditors who had already accumulated savings they could lend. Today, it is still widely believed that money lent out by banks comes from the savings deposited in those banks, just as money borrowed from a friend or relative is presumed to come from savings or wealth they already possess. But it doesn't.

The financial revolution in England over 300 years ago overcame these limitations by vastly expanding the scope and function of credit. It established a credit system independent of savings and current resources, and it did so by institutionalizing the process of creating money “out of thin air.”

It takes a little history to understand this financial revolution—history that is not taught in our schools.

It was the goldsmiths in seventeenth century London that took the first step. Clients deposited gold with them for safekeeping, receiving in turn certificates of redemption. The goldsmiths discovered that only a few clients were likely to redeem their deposits at any given time. This allowed them to issue more certificates (as loans) than they actually had gold on hand to redeem them.

This new expansion, or leveraging, of the money supply (more certificates circulating than the actual gold backing them) has come to be known as fractional reserve banking.

Note that nothing is backing this new additional money, apart from confidence in the supposed ability of the borrowers to repay it in due course. It is created merely on the say-so of the lenders. The borrower suddenly has new money to spend—money that was not there before and that was not minted, earned or saved up by anyone. It is a slip of paper, with a corresponding accounting entry in the lender's book—no more and no less.

Important as this step was, the goldsmiths remained private proto-bankers, limited by the deposits they could attract. They were vulnerable to “runs on the bank”—sudden, excessive withdrawals by depositors which left them unable to pay out gold as promised, leaving them insolvent. Money created out of thin air, essentially as a confidence trick, could just as easily vanish into thin air as soon as confidence wavered.

This problem was exacerbated by Charles II’s insistence on ever-greater loans to conduct his military campaigns, which he could not repay. A major default by the monarchy occurred in 1671, putting many goldsmiths and other money-lenders out of business. This pattern was typical of early modern finance, where monarchs borrowed largely to fund their wars of conquest without sufficient income from taxes and royal estates to repay them.

An ingenious and fateful response to this financial instability came with the foundation of the Bank of England in 1694. A group of about 1500 investors agreed to assume the royal debt—since renamed the “national debt”—in return for a monopoly on the right to issue their own notes (loans, that is) to the public guaranteed by the reliable repayment of the government’s debt through taxation. These notes—which subsequently became known as British pounds—soon started circulating as the currency of the land.

This currency-as-debt was still ultimately denominated in precious metals, but the presence of the royal imprimatur, backed by the power of the state to meet its obligations by forceable taxation, made its indebtedness “as good as gold” for the creditors.

As this new arrangement sprung into being, nobody seemed to ask the very obvious and important question:

Why is it that a group of private investors was granted the unprecedented license to automatic public taxpayer backing and, if need be, outright bail-outs for their own privately-issued notes (loans), which were allowed to function as the currency of the land, displacing precious metals?

Since the power of the state to tax its citizens rests on a perpetual right, it follows that any private loans backed by tax receipts can also be issued, and reissued, in perpetuity. The result was a perpetual national debt used to back up perpetual private lending.

But the private bankers immediately took a further step, making full use of the fractional reserve principle of the goldsmiths: they proceeded to lend far beyond the actual amount of government debt on their books. Thus, only a fraction of the notional “money” they generated out of thin air was formally backed by the taxpayer.

Which leads to another very important question that also wasn't much discussed, then or now:

What if confidence lapses, there are bank runs, and it turns out that the government guarantees are insufficient?

The modern answer to this question is... bail-outs; it turns out that the taxpayer is on the hook not just for the government debt, but for all the private debt issuance as well.

But that's not all. Not only were these private loans backed by the taxing power of the state, but the bankers issuing them took full advantage of the relaxation of traditional prohibitions on usury. This allowed them to charge as much interest on these loans as the market would bear. In other words, they were able to skim off a generous profit for themselves simply by virtue of issuing money which they alone were allowed to freely create!

Sounds outlandish? You bet! ? Yet this is the essence of the financial revolution, which Alexander Hamilton, one of its admirers, accurately called “the English system,” and it remains the basis of our financial system today.

How does all this explain the industrial revolution? Think of it this way: for the first time in history a widespread source of reasonably secure credit became available, backed by the state, and free of the worst risks previously borne by individual lenders like the goldsmiths, or earlier family bankers like the Medici or the Fuggers. This made a huge difference: borrowers who could tap into this new credit found themselves with the wherewithal to invest in modernized production methods, becoming more profitable and outstripping their competitors.

This happened initially in agriculture, with the improvement of landed estates, and then spread to manufacturing. And even though these new loans had to be repaid with interest, which was commonly at usurious rates, the benefits of the improvements gained made the loans profitable for the borrowers as well as for the lenders.

For the first time in history, it became possible to systematically and reliably borrow against the future, betting that the future will always be bigger, better and richer, making it perpetually possible to issue ever more debt with which to roll over previously issued debt. This is what made steady economic growth through investment in innovative production methods—in short, industrial revolution—possible.

Which leads to yet another very important question that wasn't much asked:

What happens when it turns out that the future is not going to be bigger, better and richer, because the essential resources have been exhausted?

The modern answer to this question, which we are staring at now, is this: financial, economic and political collapse.

But we are getting ahead of ourselves. Remember that the price to be paid for industrialization was the interest charged on the borrowed money. This means that an enterprise, if funded by borrowed money, had to grow to compensate the lender as well as to repay the principal. Gradually, previously steady-state traditional enterprises were either destroyed by their more productive industrial competitors, or they too financialized, putting themselves on an ever-accelerating treadmill of debt.

Albert Bartlett and Chris Martenson, among others, have elaborated in Malthusian fashion the idea that the modern economy functions on the self-defeating principle of exponential growth.

But yet another questions remains: Why did exponential economic growth catch on and continue for the last 250 years? It turns out that exponential growth has a very specific driver: the usurious rates of interest charged by the new financial system created by the financial revolution.

In short, the use of borrowed money at interest provided something that did not exist earlier: a compelling motive to grow economically. Once the reciprocal exchanges of traditional, more or less steady-state economies were replaced by the use of credit borrowed at interest, it became necessary to come out ahead: one had to gain more from any exchange than the other party in order to make a profit and to pay interest to the lender.

For the first time in history a fateful imperative to growth—and exploitation—was built right into the economy. Usurious credit is what kicked economies into overdrive, forcing borrowers to exploit both people and natural resources far beyond what was allowed in traditional economies that were based on reciprocity among participants.

So yet another question--never adequately addressed--arises:

Why is it that personal vices and mortal sins have been assigned the role of foundational economic principles?

Ambition and avarice, previously private vices, were institutionalized in the financial system by usurious credit, allowing them to be legally and culturally objectified and thereby enormously magnified. No longer merely personal qualities, they assumed the power of social imperatives.

For a long time, as long as new resources and pools of labor could be exploited, all went well for the exploiters (and badly for the exploited). New frontiers were opened up and “developed,” in the New World and elsewhere, usually at the point of a gun, and slaves and indentured servants were brought in to do the labor.

Simultaneously, peasants in the old world, forcibly displaced by enclosures and the modernization of agriculture, were herded into factories as workers. Deprived of their traditional, largely independent and sustainable ways of life, they became wage-laborer consumers who had to buy goods and services at market prices.

It turned out—for a considerable time--that the globe had enough land, minerals, arable soil, fisheries, and forests to support an unprecedented explosion of production. It also turned out—for a considerable time—that the globe had enormous untapped sources of energy—particularly fossil fuels—which magnified productive potential many-fold.

The exploitation of these resources is what we call the industrial revolution.

And now it has run its course. The resource limits of a finite planet have finally been reached. There are no new frontiers left. Population has exploded, arable land has been used up, forests have been cut down, fisheries have been depleted, minerals have become scarce, the environment has been degraded and polluted. Investments in the production of fossil fuel energy, which has underpinned economic growth, have finally reached the point of diminishing returns, even as they continue to drive costly and destructive climate change.

In the meantime, the banking system has continued to lend out far more money than there are real assets in the world to back it. Hundreds of trillions of dollars of debt now dwarf the potential of the global economy to ever produce enough to repay it. We are facing another cyclical boom-bust financial crisis, to be sure, but this time it really is different: the potential for recovery and further growth can no longer be presumed to exist. The system has plateaued, for the moment, but having been designed for endless exponential growth, not for a steady state, it is destined to unravel.

It is important to understand, in sum, that “the English system,” now established worldwide, is a privatized, usurious financial system established as a monopoly by the state to benefit private investors, and is involuntarily backed by its taxpayers (as evidenced in the recent bailouts of banks deemed “too big to fail”).

This system is the root cause of the industrial economy.

What are the lessons in all this?

1. Exponential growth, powered by the financial system, is unsustainable, and doomed to collapse. This is the nature of any exponential process.

2. The true villain of the piece, and the cause of exponential economic growth, is our current, outrageous financial system, defined by the lending of money at usurious and therefore exponential interest rates by a private monopoly backed by the state.

3. The vast power unleashed by this financial-industrial revolution has completely corrupted those who have been able to manipulate and benefit from it, resulting in an inhumane, narcissistic culture of arrogance, contemptuous of traditional, sustainable ways of being.

4. Our financial system is a relatively recent invention, devised by clever, selfish men for their personal gain. It is not the product of any natural or inevitable process, nor of democratic deliberation. It is a scam. We need not be stuck with it, and the sooner we rid ourselves of it the better.

5. A sustainable, post-collapse economy on a finite planet will require a return to reciprocal, cooperative arrangements for the exchange of goods and services. Loans will have to be based on current collateral, not on leverage or on speculative exploitation of (increasingly non-existent) resources.

6. Usury will have to be prohibited in future lending. The monetary system, by which money is created through lending, cannot be a for-profit monopoly, whether it be private or public.

7. Any future financial system will have to be designed to avoid concentrations of financial power, making it possible for it to be held accountable by the public. If money creation is to serve the public, it must be done locally by institutions that are locally controlled.

Adrian Kuzminski is the author of The Ecology of Money: Debt, Growth, and Sustainability (2013), Fixing the System: A History of Populism, Ancient & Modern (2008), and Pyrrhonism: How the Ancient Greeks Reinvented Buddhism (2008), among other works.

Great post, but it left out the great raging gorilla in the room. Human population levels will have to be reduced to sustainable levels, approximately 1/15th of what they are now or less. Although this will certainly occur one way or another whether we like it or not once financial and industrial collapse occurs, how it occurs might well decide if there's any of us remaining at all afterward. Me being no genius, I'm hardly the only one to have figured this out. Early returns indicate that the the global elite who have the most to lose from financial collapse have certainly figured this out already and are positioning themselves accordingly. The bottom line is that global finance and industry will recede (and is receding as we speak) just like the money supply, from the bottom up, leaving the hyper-rich to enjoy the last supplies of fossil fuel energy and the rest of us to do what it is we're expected to do - die in large numbers. Human beings being human and all, I don't expect that process be a peaceful one.

Re the statement that economics pre the industrial revolution was in a steady state, well maybe less rapidly growing than post revolution but given that human population growth ever since the end of the last ice age has been exponential (a brief period during the plague being the only exception), and economies grow with their supporting population, we can say, yes maybe pre-industrial economies were sustainable but sustainable for how long? On a sufficiently short timeline anything and everything can be sustainable and on a sufficiently long timeline, nothing is sustainable. Species have lifespans. Ergo the human species has a finite lifespan and whatever economic scheme we come up with will end when we disappear. We should also forget about the notion that farming is a sustainable activity in places where it mines topsoil and groundwater at faster than replacement rates.

It is a good essay. So, I can agree that financial usury is a key component that undermined the global human project. But is it the key component? I would submit, that no, it is not. Rather it is the ecologically usurious path of agriculture that set the stage for all this nonsense. 8k - 6k years ago, we embarked on a project of mining the topsoil, of clearcutting ecosystems to provide the surplus, with which we support the priesthood, military, merchant class, and all the other aspects of Empire. All the rest is a foregone conclusion.m the Inferno, Canto XI:

"Once more go back a little to the point,"I said, "where you state usury offendsThe divine goodness, and untie the knot."

"Philosophy, to one who understands,Points out — and on more than one occasion —How nature gathers her entire course

"From divine intellect and divine art.And if you pore over your Physics closely,You’ll find, not many pages from the start,

"That, when possible, your art follows natureAs a pupil does his master; in effect,Your art is like the grandchild of our God.

"From art and nature, if you will recallThe opening of Genesis, man is meantTo earn his way and further humankind.

"But still the usurer takes another way:He scorns nature and her follower, art,Because he puts his hope in something else."

Actually there is no interest rate, usurious or not, that will not require or create exponential growth. Because every interest rate is an exponent. Even a measly 0.1% interest rate corresponds to an exponent of 1.001. Keep multiplying that repeatedly, and you will have exponential growth.

Also worth noting is that many "exponential growth" functions have a long, relatively flat portion over there on the left. They are "growing exponentially" the whole time. (Not just during the steep part on the right.)

Excellent post. I can only hope to conceptualize it as well as that.I wonder though if the author's narrative wouldn't be more complete if he was able to give fossil fuels similar importance as he does credit.

If he took into account the enormous contribution that fossil fuels --ie ultra high grade anthracite then lite sweet crude-- gave to English Crown cronies in exploiting every other resource he mentions.

If as per "www.oildrum.com/node/4315" a barrel of WTI (~42gals) equals ~25K man-hours (~11years of 40hr workweeks); that, and the vast quantity we've used up in this short amount of time, goes a long way in explaining why previous societies --who had similar capacity for sociopaths and technological know-how as we do today-- didn't quite manage to trigger the overshoot we're currently in.

Michael Hudson ( michael-hudson.com) would add that there have in fact been periods of exponential financial 'growth' in the past, but that these were naturally terminated by economic crashes and debt write-offs aka bankrupcies (generally crash first, then write-off.) Such crashes continued well into the industrial period, the more recent change has been the bail-out, letting the financial system continue its expansion (at the expense of the real economy) while debts continue to mount.

Minsky, considering the behavior to be expected of a government-supported 'investmest' market back in the 80's, decided that initially after a crash, investment would be cautious and very much based on assets & potential income of an enterprise. As the realization sunk in that unsuccessful bets would -- for those with sufficient government support -- be covered by the government, there would be increasing presure to increase the rate of growth of a fund to be invested -- naturally, this would be by choosing riskier outfits promising higher returns. Eventually such a market naturally evolves into what he called a 'Ponsie' mode of operation, with the sort of results we began to see in the late 80's savings-&-loan scandals (where some of the worst offenders were actually thrown to the wolves afterwards) and this has continued right on since, given what used to be called the 'moral hazzard', more recently 'criminogenic environment' well described by Bill Black...

The 'industrial economy' is no longer being well-served by this increasingly parasitical system, which is by now considerably larger than its host. (Far more net money is exchanged daily between banks than there are real assets or income available in the entire real-economy; the real economy thus becomes a lousy place to invest for anyone after a fast-growing buck.) How long before the auditors move in? -- Well, guess who's paying the auditors?

What happens now? I gave up holding my breath while awaiting that final loud "Crunch!" -- but this does all seem the least bit unstable, yes?

A good summation of what the internet intelligentsia has come to understand on the shocking nature of fractional reserve banking and the debt money system and its global ecocidal and genocidal long-term implications.

But the most horrendous part of the story is missing.

The goldsmiths, the Medicis and Fuggers, the Central Banksters were, like all fraudsters, well aware that by the time the common folks came to understand the cosmic scale of this particular Ponzi scheme, there would be revolution. So they took precautions.

It is called the security state. Thanks to unlimited funds through fraudulent banking, so well described above, the security apparatus has grown even at a faster pace than the industrial revolution itself and has, by now, under-mined and incorporated basically the whole eco-social-cultural-political structures of all nations of this planet.

The 'owners' of the banking-cartel share the paranoid opinion that only the most ruthless and comprehensive high-tech enslavement of the whole of humanity will guarantee the continuation of their 'ownership' of planet earth and and all its inhabitants.

And lets not forget while we are at it, imperialism and the enslavement of millions upon millions of human beings who generated the wealth that was turned into credit in the financial system. The theft of the labor, resources, wealth and output of much of the world, first by the Portuguese and the Spanish then by the English is what underlies this financial system and hence the entire edifice of western wealth and prosperity.

Roman Banking had just about all the same characteristics as modern banking, save the computers.

The main difference was that the Roman system and their technology collapsed before they got to unsderstanding thermodynamics and the gas laws. They also did not have sufficiently developed metallurgy to do the drilling necessary to access the fossil fuels in any quantity.

The system leveraged up once the steam engine was applied to accessing coal, and then coal was used to access oil.

The Western European nations got to this bizness first, and they leveraged up Empire around it.

banking facilitated this, but it wasn't the driver that took it over the top. It was the scientific understanding of thermodynamics, the gas laws and on a mathematical level the calculus that made the difference.

I am astonished that the author, Adrian Kuzminski, was able to construct a learned essay on the dynamics of capitalism without once using the C-word. Nor does the author make reference to a certain KM, the foremost analyst of that system. By not naming the entity forthrightly, Kuzminski for one thing denies his readers direct access to a burgeoning critical literature for which the C-word is a key concept. By this same artifice he signals his distance from the socialist camp.

I cannot help wondering if the dread shadow of Senator McCarthy still causes American intellectuals to lay awake at night painting the ceiling with pastel circumlocutions.

Just the same, for all its conceptual evasiveness Kuzminski's article is worth a close read. By emphasizing the monetary aspect of capitalism, namely fractional reserve banking, it could help bridge the socialist and libertarian critiques of a system that is destroying our life-world with unremitting creativity.

Kuzminski replies to some of the comments, which are much appreciated:

On population growth: this too has been a consequence of the financial revolution. The success of the revolution in motivating people to exploit resources beyond anything before is what made it possible for the population growth to take off. By tapping into and drawing down the natural capital of the earth, it became possible--temporarily--to support a population on the planet far beyond its carrying capacity.

On Roman banking: Yes, the Romans had a sophisticated banking system, but they failed to integrate their credit system with state borrowing backed by taxes. They had no national debt. They had no financial revolution in the sense I'm trying to describe.

On fossil fuels, theromynamics, etc.: Again, I see these developments and scientific innovations and insights as arising out of the compulsion to grew as dictated by the financial revolution, not the other way around. Just having a theory like thermodynamics doesn't mean it's going to be applied. As I recall from my history of science days, the theory followed the development of steam engines, etc., which were utilized to make money, which was (and is) the overriding imperative in a usurious credit system.

On the financial revolution being the key component: No one, IMO, has satisfactorily explained the motivation behind the industrial revolution, which is what I'm attempting here. It is perhaps a reductionist argument, but not all reductionist arguments are necessarily wrong. Most of the explanations hitherto given take one or another or a group of consequences and argue that they are in fact the causes. I'm not persuaded.

On agriculture as the engine of growth: Until additional external pressure was introduced in the form of having to pay back interest, the compulsion to expand agriculture was limited to more transient causes: opportunity, population growth (at least locally), isolated innovations, etc. What the financial revolution did was create on top of those a sustained, exponential compulsion, something I don't think existed before.

On the national security state: Yes, of course, its job is to defend the system. I'm trying to address how the system came into being in the first place.

No matter what, the drop in the availability of cheap energy will make these problems stop. Unfortunately, the stopping part can be painful. Instead of gently tapping the brakes and slowing down, we're going headfirst into a wall (or, off a cliff, depending on the metaphor you want).

Makes you wonder - if (almost) limitless energy was made available *now*, what would happen? How much more draconian and oppressive would our system become? Even better - how much larger would the crash be? How much more would the environment be trashed?

James Howard Kunstler's "The Long Emergency", amongst other great insights, explains how modern financing came into being. Richard Heinberg's also full of great insights, details how energy has been used culminating in fossil fuels and the rise of industrial society or what others have referred to as "petroleum man".

For those of you who wonder how the alternatives to carbon based fossil fuels compare, both books give a pretty detailed analysis of the energy returned on energy invested ratio of putative replacements for fossil fuels. I now know what Dmitry meant what I asked him the question years ago before I read those two books regarding the efficacy of "green technologies"...."doesn't look good....anything green will get eaten". The first response to most people is to wonder or hope or engage in denial that some alternative combination of "green" renewable technologies will somehow mitigate what will inevitably be a grueling, devastating, hard crash back to pre industrial conditions. Know that the new predominate human activity will not be concerning yourselves with Bruce Jenner, Donald Trump's last statements of ignorance and/or arrogance, or whether the local ball club came close to winning today, the usual junk food for the mind. Rather, it will be growing and gathering your food, obtaining fresh drinking water that is safe for human consumption, finding ways to stay warm when its cold out, maintaining shelter from the elements. Family relationships in intensely local, agrarian communities based on sustainability and simple barter will become the new social arrangements for those who survive losing their muscle cars and Sunday night football and all the other priorities that people presently chose to occupy their daily lives with.

As pointed out by Dmitry Orlov, JHK, Richard Heinberg, and the late Michael Ruppert inputs from fossil fuels allowed the earth's carrying capacity to swell from its pre-fossil fuel natural carrying capacity of roughly 1 billion people to its present capacity of 7 billion people. When fossil fuels are set to be depleted forever by the middle of this century, that figure is projected to be some 8 billion human souls. The mass planting, irrigating, harvesting, and transporting food involve direct inputs from fossil fuels (I believe 10 kilocalories of fossil fuel for every one kilocalorie of food grown), the fertilizers made possible only by a process using natural gas, and the pesticides are derived from fossil fuels.

Richard Heinberg goes into clear and concise detail about how nature's ecosystems had evolved methods of keeping populations from over growing (mammals delay lactation, etc many mechanisms that keep populations in check). With all ultimately recoverable fossil fuels depleted forever in a mere 30-40 years, the depressing reality is that at least 7 billion people will simply "die off" because there will not be enough food to feed that artificially swelled population. Either from disease though malnutrition, warfare and conflict over forever diminishing resources, or outright starvation, at least 7/8 of the world's population around the year 2050 cannot be sustained. The limits to growth have been reached, and the resource wars are getting more obvious as dying empires like the US are showing signs of sheer and utter desperation. That 1 billion pre-fossil fuel figure is probably overly generous, as the planet and many of its ecosystems and resources have been plundered, raped, poisoned, and destroyed with climate change showing no signs of abating.

That is the cold, stark, harsh, naked truth the people are going to have to face in the immediate, short term, and long term future. There is no way nor is their any point in trying to sugar coat it.

I'm of the Automatic Earth school which says it was fossil fuel energy particularly oil, which created the modern industrial and highly centralized world. Debt and finance were outgrowths of the power of energy. I suppose an endless chicken or egg debate on this could proceed for a very long time. Does it matter? Probably not. Not for the millions or billions that are going to face existential peril. History is just a story after all.

Waxing philosophical I say that humans are programmed to seek power. The power of energy or the power of money and finance, it's all the same. If it is there for the taking it will be taken.

Adrian,Nice essay.You make a good case for the "English system" of credit as the proximate cause of the industrial revolution. Others would point to the steam engine, capitalism, fossil fuels, the enclosures, liberalism, or perhaps a confluence of those forces. But you haven't addressed ultimate causation. For that you would have to look at biology. Competitive exclusion, dominance hierarchies, and wealth displays are prominent features of primate life, and biotic potential is the force driving all life forms. Humans are just pond scum expanding to fill the pond, or bacteria in a petrie dish growing till the food is gone and then dying, and we have few predators. Many other civilizations have overshot their resources and collapsed. Ours is no different.

"On Roman banking: Yes, the Romans had a sophisticated banking system, but they failed to integrate their credit system with state borrowing backed by taxes. They had no national debt. They had no financial revolution in the sense I'm trying to describe."

As I recall, state borrowing from Roman Bankers was fairly common. I believe it was Cleopatra's father, Ptolemy who went in debt to the Romans to keep his rule of Egypt, and when he died the debt passed on to Cleo. This then got all the nastiness going between Marc Antony and Caesar. They also definitely had a taxation structure in both Egypt and Rome, taxes go right back to the invention of money itself.

"On fossil fuels, theromynamics, etc.: Again, I see these developments and scientific innovations and insights as arising out of the compulsion to grew as dictated by the financial revolution, not the other way around. Just having a theory like thermodynamics doesn't mean it's going to be applied. As I recall from my history of science days, the theory followed the development of steam engines, etc., which were utilized to make money, which was (and is) the overriding imperative in a usurious credit system."

Chicken Egg Question. Money is a proxy for Energy, you can't expand debt without the Energy to back it up. The technological innovations the Romans got through in Metallurgy weren't sufficient to access the energy that came through the invention of the steam engine. They were on the cusp of it, the Greeks actually had a working form of steam engine, but it was a toy. Before they could get to this point, the Empire collapsed and with it their monetary system, and you had a millenia long hiatus on this stuff until the Enlightenment. Once the Energy became accessible, Bankers were able to vastly increase the money supply, by several orders of magnitude actually. Then they started applying the Calculus to money flows, and it is no coincidence that the main Banking Houses grew up in England and Germany, home to the two guys who came up with that type of analysis, Isaac newton and Wihelm Gottfried Leibniz.

It's a chicken/egg question but it does certainly seem that finance came first. It's also worth noting that both finance and industrial production were not completely out of control even as late as the 70s. There were actually checks and balances in the system, reserve requirements, gold standard, etc.

It was at this time that we decided to let the system go exponential rather than reform it. And yes this does mean we're screwed. The system is beyond reform now.

It would seem that the problem isn't high interest, but almost no interest money given to unscrupulous exploiters and traders. We've come to expect to get no interest on our savings accounts. Obviously what's needed is "peoples banks" making money available for actual production of goods and services, and not just paper trading. Also, a series of public interest spots on TV which would demonize consumption and encourages savings and make frugality and minimal consumption sexy and with-it!

It is absolutely true that interest is one important driver in the beginning of the industrial revolution. But I add here the magic word of Buckminster Fuller: Synergy. What lead to the explosion of demography, stupidity and brilliance after 1789/1917 was the synergy developed between numerous different elements which were not present in earlier stages of history. Anyway. Industrial revolution is nothing more than acceleration. There is much more continuity than disruption after 1789/1917. Since the end of ice age human society started to split into masters and slaves, exploiters and exploited, employers and employees. By the use of force and deception those who considered themselves superior lived on the back of those producing something. That is why agriculture is since a very long time a way to exploit the soil - not to cultivate it, as the name wrongly suggests.Master and slave is the basic scheme, that you can call traditional. It's evident that after 1789/1917 the scheme was still the same, just faster. Why 1789/1917. Because French and Russian monarchy were indeed the two major remaining forces trying to defend the older and slower feudal model against the British Empire - engineered, by the way, in big parts by the Maranes, Dutch Jews who had escaped Spanish inquisition.As all this has gone since a long time we will probably never know if electricity, chemistry and all that stuff would have been used for better things in better ways if French and Russian monarchies - or Nazi Germany - had taken over control. Conclusion: no matter if there is interest or no interest on money out of thin air, the basic scheme of splitting humanity into masters and slaves remains the basic "problem" to be solved, as humans cannot, even not in slower ways, take advantage of their full potential if they are forced to accept this schizophrenic reality.Look at occupy, it's the most ironic expression of the basic mental framework. Instead of the 1% they would like that 99% will occupy instead..

The article should be commended for so concisely describing the role of finance capital in creating the exponential growth dynamic that is driving our species over the cliff just as certainly as a herd of mad lemmings. I've long thought that there is a law of peak debt that applies in consumer debt-slave societies like the USA, and that law is every bit as mathematically sound as ones describing peak oil.

However I'm less certain which came first, the chicken (cheap, concentrated energy) or the egg (money out of thin air.) I'm surprised that nobody mentioned the case of command economies where the majority of investment is directed by the same entity that has the power to coerce taxation. The Soviet Union industrialized at a rate similar to that of western capitalist countries during the period from the Russian Revolution to the collapse of the Soviet Union. While I'm sure that lending at interest was a part of the economic landscape, was it the driving force that the author assigns to it in the "British System?" Dmitry?

In the US the two most profitable growth sectors of the economy -- The military industrial warfare state and the legalized drug business (AKA the health care industry) are profitable at almost any level of interest rate. Far more important is the cost of buying senators to insure policies that keep contracts for ever-more expensive weapons systems flowing and new wars constantly in the pipeline. Or regulations that require everybody to buy private for-profit insurance coverage, or support unlimited pricing and artificial scarcity of the drugs that they control through state-granted monopoly.

According to Gregory Clarks book "Farewell to Alms: A Brief Economic History of the World", the reason why the industrial revolution occurred in Britain and other parts of Europe may rather have been genetic selection. As Clark has found, by studying last wills in England, for several centuries the rich and successful people did have much more children reaching the adult age, than poor people did. There seemed to have been a migration form the rich to the poor. The final effect was, that for several generations, there has been a genetic selection based an economic success.However, the industrial revolution die revers this process and for several decades now religion and a low level of education and economic success, as well as belonging to non white ethnicities is genetically advantageous, while at the same time the resources become less and the environment degrades.

I agree the monetary system allowed for the exponentialization of growth and for increasingly numbers of human beings seeking and achieving wealth by exploiting whatever their creativity could come up with as worth exploring.But I rather think that that was only possible when the individual sapiens became free from religious fear and despotic rule/abuse. Man is a curious and creative animal, but only when He can be free to reap part of the benefits of his endeavours will He persistently pursue higher levels of well-being for Him and the ones around Him, through technological improvements, increased trade or whichever way he can.If for a thousand years of dark ages your King or your church insist in exploring you with taxes, class segregation and fear, if they take all of Man's potential and waste it in endless wars, building useless castles and monuments to the same Kings and gods that demand you to be ever fearful or else you will burn at some cross, no human individual endeavour will be sustainable or even worth trying. First you unleash Man. Then maybe some things like the spinning jenny or the steam and the internal combustion engines can really come up and provide huge increases in productivity and exponential growth.And that was why it started in England.Where the people had more Liberty and knowledge circulated with increasing freedom.That, for me, is the big spark.

Other peoples in other times in history achieved technological advantages over their neighbours or even the entire world. And one could argue that the combination of human freedom and unlimited "fiat" monetary resources may have been at the source of such an exponential growth. But I am not so pessimistic as most opinions here about this civilization coming to a standstill soon. Fossil fuels can be replaced by both cleaner and dirthier sources of energy. And population growth will only really be addressed/regulated once we don't have enough technology to provide for its survival. Imagine we can synthetize cheap food capable of replacing anything that comes from the earth with no secondary effects to our health... we will just keep on growing throughout the planet, with the occasional war and catastrophe not really setting us too far back in evolution.